The income-tax department has demanded that foreign portfolio investors pay minimum alternate tax by March 31, just days after Finance Minister Arun Jaitley promised an end to tax terrorism and an adversarial tax regime.

On Monday and Tuesday, some heads of foreign investors met I-T officials along with tax experts and were told "nothing has changed" regarding demand for MAT. Investors were asked to pay up by March 31.

Angry investors are now planning to move court against the department contending that the tax does not apply to them. Last Saturday, Jaitley clarified that capital gains "which are liable to tax at a lower rate, shall not be subject to MAT".

Jaitley, however, did not clarify that whether this would apply retrospectively and the I-T department has taken a view that the finance minister's clarification doesn't apply to earlier years. "If MAT is levied on FPIs for the past years on the basis that the amendment is not clarificatory, there will obviously be litigation," said Ketan Dalal, senior tax partner, PwC. "Given the intent which is that it should not apply, presumably representations to clarify this will also be made to the government.

The representation would logically also extend to the broader issue that MAT was never supposed to apply to foreign companies anyway and that is also borne out from the explanatory notes when MAT was introduced."

NOTICES TO 90 FPIS

The I-T department sent notices to around 90 FPIs and this could be extended to about 6,000 FPIs. At present, taxes on short-term capital gains from equity and equity-linked products is 15% and FPIs are not taxed on their long-term capital gains. FPIs investing in India through Mauritius that claim benefits under the tax treaty with the island nation do not pay any taxes on gains from the stock market. I-T department wants to levy 20% MAT on book profit. If MAT is levied, then FPIs would have to pay 20% tax even on their long-term capital gains.

"The I-T department is not taking the finance minister's announcement in spirit and some FIIs have been intimated that MAT would still be applicable on their book profit on long-term gains for financial years up to 2014-15. This will be a huge disappointment for FIIs and we see that many FIIs would take up the litigation route in the coming days," said Rajesh H Shah, partner, tax, Deloitte Haskins and Sells. Industry trackers fear that going ahead, the MAT can also be levied on many other foreign players including private equity firms. "Unfortunately the carve out from MAT is only for FPI/FII and that seems to indicate that other foreign companies are within the purview of MAT. This does not appear to have been the intention behind the introduction of MAT," a senior tax consultant said.

In October last year and then in January this year, the I-T department had sent showcause notices to FPIs for MAT. In 1996, while announcing the imposition of minimum alternate tax, the finance minister P Chidambaram said it was ideally meant for only Indian manufacturing companies who have a balance sheet in India.

Industry trackers say another risk is that once the authorities decide to levy MAT, they would also want to charge MAT for the past years by issuing a notice for reassessment.

Under law, reassessment notice can be issued for past 5-7 years depending on conditions. The Budget proposals should also have been clarified on a retroactive basis (by way of an explanation) that foreign companies which do not have a fixed base or permanent establishment in India will not be liable to MAT.